ConocoPhillips, the $226 billion Houston-based oil giant, yesterday said that it will spin off its refining and marketing operation, in a move aimed at creating more value as two separate publicly-traded companies.

The announcement sent the stock pf the third largest oil firm in the US up by 6.43 per cent to $79.18 in morning trading on the New York Stock Exchange. ConocoPhillips plans to separate its oil refining and marketing business from its exploration and production operations.

The split would create two publicly-traded companies, one focused on finding and extracting oil and gas around the world, and the other on converting the crude into refined products such as gasoline that could be sold to consumers.

It is the first oil major to shift from the decades-old industry strategy of consolidating production and refining, though in May 2011 the much smaller Marathon Oil decided to spin off its refining business by forming Marathon Petroleum Corp, a stand-alone company.

ConocoPhillips will become the largest refining company in the US based on capacity and the largest exploration and production company based on oil and gas reserves

Oil rose Tuesday after the Organization of Petroleum Exporting Countries said global demand will be the highest ever this year, although the “unsteady” global economy may slow demand more than previously thought.

Benchmark West Texas Intermediate crude for August delivery rose 45 cents to $95.58 per barrel in morning trading on the New York Mercantile Exchange. Brent crude, which is used to price many international oil varieties, fell 54 cents to $116.70 per barrel on the ICE Futures exchange in London.

Analysts and investors pay special attention to world demand forecasts. The expectation that China and other developing nations will keep using more crude has supported prices this year despite weak gasoline consumption in the U.S. and a festering credit crisis in Europe that has raised concerns about international demand for oil.

While OPEC thinks global demand will continue to increase this year to the highest levels ever, the monthly report it released Tuesday said that demand won’t grow as much as it previously expected. The cartel said daily world consumption will increase this year by 1.36 million barrels — down from a previous estimate of 1.38 million barrels — to an average 88.18 million barrels.

OPEC said it cut demand expectations “as the unsteady global economy has added risks to the forecast.” The report also said it’s hard to estimate how much oil the U.S. will consume this year. Gasoline consumption fell ahead of the summer driving season as retail prices approached a national average of $4 per gallon. A gallon of regular has since dropped by nearly 35 cents to a national average of $3.636 on Tuesday, according to AAA, Wright Express and Oil Price Information Service. It’s still 92.1 cents higher than the same time last year.

Meanwhile, the Labor Department said Tuesday that job openings were flat in May, suggesting that hiring may not pick up this summer. The U.S. trade deficit also jumped in May to the highest level since October 2008, primarily because of a surge in the price of oil imports at that time.

In Europe markets slumped on fears that Greece’s financial crisis would spread to Italy and Spain. The dollar continued to rise against other major currencies. Oil, which is priced in U.S. currency, tends to fall as the dollar rises and makes crude more expensive for investors holding foreign money.

In other Nymex trading for August contracts, heating oil fell 2 cents to $3.0657 per gallon and gasoline futures lost 2 cents at $3.0515 per gallon. Natural gas gained 1 cents at $4.291 per 1,000 cubic feet.

Marathon Petroleum Corp. has debuted on the New York Stock Exchange as the second- largest U.S. independent oil refiner after surging gasoline prices drove a year long rise in refining stocks.

Marathon Petroleum is being spun off from parent Marathon Oil Corp. (MRO) amid growing investor demand for companies that can capitalize on gasoline prices that rose at twice the rate of crude oil in the past 12 months, said Sam Margolin, an analyst at Dahlman Rose & Co.

The refiner is valued at $14.7 billion in unofficial trading permitted by exchanges to help investors gauge demand, on par with the largest independent refiner, Valero Energy Corp., which has twice the fuel-making capacity. Marathon Petroleum is poised to capture higher margins thanks to upgrades at plants that account for half the company’s oil processing, said Jacques Rousseau, an analyst at RBC Capital Markets LLC.

“It’s seen as a new name in a group of companies that have run up aggressively in the past year, and people think it’s an opportunity to buy a stock that doesn’t have a chart showing a year’s worth of massive gains behind it,” said Margolin in a telephone interview from New York.

Marathon Oil Chief Executive Officer Clarence Cazalot in January revived a plan to split off the refining division after years of frustration that the fuel-producing unit was a drag on the value of the company’s more profitable crude and natural-gas business. Cazalot, a former exploration chief at Texaco Inc., canceled the original spinoff in February 2009 after the global financial collapse deflated equity markets.

Asset Sales

Since then, Marathon Oil has sold off $1.9 billion in refining, storage, pipeline and retail assets, including a plant in Minnesota, and hundreds of convenience stores. The margins earned in the U.S. from processing crude into fuels during that time almost tripled as the recession ended and energy demand rebounded.

Since assuming the top job at Marathon Oil when it was spun off by U.S. Steel Corp. in 2002, Cazalot, 60, has quadrupled net income and expanded the company’s search for oil and gas to Iraq, Indonesia and Poland. On June 1, the company agreed to pay $3.5 billion to Hilcorp Resources Holdings LP for Texas leases that may add the equivalent of 100 million barrels of crude to its reserves by the end of this year.

As a result of the transaction, Cazalot raised his production-growth estimate through 2016 to 5 percent to 7 percent a year from a previous forecast of 3 percent to 5 percent.

Marathon Petroleum’s margins probably will widen starting in late 2012 after the completion of a $2.2 billion upgrade to the company’s Detroit refinery that will boost its ability to process cheaper crude, RBC’s Rousseau said in a telephone interview.

The Detroit project will increase the refinery’s capacity to handle heavy crude from Canada’s oil sands to 100,000 barrels a day from 20,000 barrels, Rousseau said. Heavy Canadian crude sells for 20 percent to 30 percent less than the lighter types of oil from the Gulf Coast that the Detroit refinery currently primarily runs, he said.

Rousseau, who has an outperform rating on Marathon Petroleum, estimates the Detroit upgrade will add $1 to Marathon Petroleum’s annual per-share earnings. He expects the shares to reach $50 within a year.

“There’s a lot to like with this story,” Rousseau said.

Refining Consolidation

As a stand-alone refiner, Marathon Petroleum will have more volatile earnings than its parent because retail fuel markets tend to fluctuate seasonally, said Ted Harper, an asset manager at Frost Investment Advisors in Houston, who helps manage about $6.8 billion. Frost Investment is a subsidiary of Cullen/Frost Bankers Inc. which held 23,797 Marathon shares as of a March 31 filing.

“They may need to smooth out their earnings stream,” Harper said. Marathon should expand its refining base through acquisitions, or add to its logistics business, which includes the largest U.S. barge fleet, he said.

The U.S. refining industry has consolidated in the past six years as fuel makers, faced with soaring crude costs, cut operating expenses and shed their least-efficient plants. The transactions have included Valero’s 2005 acquisition of Premcor Inc., Western Refining Inc.’s purchase of Giant Industries Inc. in 2007, and Holly Corp.’s planned merger with Frontier Oil Corp., which is expected to close tomorrow.

Texas City

Marathon Petroleum may seek to buy BP Plc’s Texas City refinery near Houston, the biggest U.S. plant ever to be sold as a single asset, said Neil Earnest, practice leader of merger’s and acquisitions at Muse, Stancil & Co., a consulting firm in Dallas.

BP’s Texas City refinery is the third-largest in the U.S. by virtue of 475,000 barrels of daily crude-processing capacity, according to Bloomberg data. The plant is larger than anything in Marathon’s refining portfolio and would provide the ability to export diesel to South America, Earnest said.

BP will have to lower its $2.9 billion asking price for the Texas City refinery before Marathon Petroleum could afford it, said Mark Sadeghian, senior director of energy at Fitch Ratings in Chicago.

Marathon Petroleum will trade under the symbol MPC on the New York Stock Exchange.

The International Energy Agency’s planned release of oil from reserves is being used as an economic stimulus measure that will serve as a “tax cut” for consumers if it’s successful in driving down prices, according to a report today from IHS-Cambridge Energy Research Associates.

The release from emergency stockpiles of 60 million barrels of oil, or 2 million barrels a day for 30 days beginning next week, follows a disruption in supplies from Libya and could boost both consumer spending power and confidence, according to IHS-CERA’s Daniel Yergin and James Burkhard.

“Although oil prices have come down since Brent reached $126 per barrel in April, worries about the potential for another economic slowdown have grown,” the report said. “The oil release signals that IEA members are taking into account the broader macroeconomic environment to decide on using strategic reserves.”

Oil for August delivery declined 25 cents to $90.77 a barrel at 2:04 p.m. on the New York Mercantile Exchange. Prices have fallen 2.8 percent this week and gained 19 percent in the past year.

How will the $800M joint venture work? Repsol will contribute cash to support growth of the joint venture and Alliance Oil will contribute producing oil assets in the Russian Federation.

Repsol and Alliance Oil Company have signed a Memorandum of Understanding to form a joint venture that will serve as a growth platform for both companies in the Russian Federation, the world’s largest oil and gas producer.

Alliance Oil will hold a 51% stake in the joint venture and contribute producing assets in the Volga-Urals Region while Repsol will own the remaining 49% and make an initial cash investment to finance future growth opportunities.

The agreement seeks to combine Alliance Oil’s knowledge and privileged access to Russian exploration and production business opportunities with Repsol’s know-how and technical capabilities to create a long-term exploration and production alliance.

In addition to the exploitation of the assets to be contributed by Alliance Oil, the agreement includes seeking opportunities for exploration and growth through producing assets in the Russian Federation.

‘This cooperation with Alliance Oil enables Repsol to increase its producing assets and obtain privileged access to assets in the country, home to some of the largest hydrocarbon resources in the world, reinforcing this growth vector of our group”, said Repsol Executive Chairman, Antonio Brufau.

‘We are pleased to develop our partnership with Repsol and together create an additional important strategic upstream growth platform in Russia. I am convinced that the joint venture will create significant value for our shareholders and make a meaningful contribution to our reserves and production,’ said Eric Forss, Chairman of Alliance Oil Company ltd.

Repsol already owns a 3.47% stake in Alliance Oil resulting from the merger between Alliance Oil and West Siberian Resources in 2008. Repsol also owns a 74.9% stake in Eurotek-Yugra, which holds exploration and production licenses in the Karabashsky-1 and -2 blocks in the prolific West-Siberia basin.

The transaction is subject to negotiation of final contractual terms, due diligence of the assets to be contributed by Alliance Oil and the procurement of the relevant regulatory and corporate approvals, which is expected to be completed during 2011.

Exxon Mobil Corp. (XOM) unveiled two major oil discoveries and a gas discovery in the deepwater Gulf of Mexico with the potential for the recovery of more than 700 million barrels of oil equivalent.

Shares were up 2.1% to $81.68 in early trading. The stock is up 33% in the past year amid an industry rebound driven by high oil prices.

The world’s largest publicly traded oil company said the find was made after it drilled its first exploration well in the region since the nine-month U.S. moratorium following the Deepwater Horizon disaster was lifted.

The announcement follows Noble Energy Inc.’s (NBL) disclosure at the end of May that it had struck oil at its Santiago prospect.

“This is one of the largest discoveries in the Gulf of Mexico in the last decade,” Steve Greenlee, president of Exxon Mobil’s exploration business said. “More than 85% of the resource is oil with additional upside potential.”

The well, which encountered more than 475 feet of net oil pay, is located in the Keathley Canyon region, about 250 miles southwest of New Orleans, in about 7,000 feet of water.

Exxon in April reported its first-quarter earnings surged 69% as the company benefited from high oil prices, stronger refining margins and a jump in natural gas production.

A very interesting analysis of the usual critics of oil companies major by the republican blog Red State. Read, think about it, and let me know what you think about this…

Left to its own devices, the oil industry is its own worst enemy. Relatively low barriers to entry have made the industry freely competitive. The reward goes to the quickest and the most efficient companies; just like in a Gold Rush, we remember the big winners and quickly forget the also-rans. Since the days of Colonel Drake, Patillo Higgins and Dad Joiner, twas ever thus.

The consumer ultimately benefits from a profitable and efficient energy business in the form of affordable and abundant energy supplies. This is because energy is essentially a “grow or die” business. An oil company that does not efficiently replace its production with new reserves is essentially holding a “going out of business sale” with every barrel of oil it produces.

The effort to replace reserves is funded out of profits.To hear the press or Leftist politicians speak, you would think that oil industry profits are a problem, a problem that desperately needs a government solution (read: higher taxes). (more…)

A year after the BP oil spill, Barack Obama announced new measures that will lead to expanded domestic offshore drilling.

The president has long said that domestic oil production is not a solution to the nation’s energy problems, but with a new campaign season approaching, he is bowing to Republican pressure and public opinion, which is heavily swayed by high fuel prices.

“I believe that we should expand oil production in America — even as we increase safety and environmental standards,” Obama said in his weekly radio address.

He said he will direct the Department of Interior to conduct annual lease sales in Alaska’s National Petroleum Reserve, an area located in the northwest corner of Alaska near the Arctic National Wildlife Refuge (ANWR), that was set aside in 1923 as a fuel source for the U.S. military.

The administration said it remains firmly opposed to drilling in ANWR.

Obama also will order Interior to speed up evaluation of oil and gas resources in the mid and south Atlantic, an area the administration opened to new drilling just weeks before the BP oil spill in the Gulf last summer.

The Interior Department will also extend the lease periods for companies forced to shut down operations in the Gulf following the oil spill.

The White House also indicated that the Interior department will hold additional lease sales in the Gulf of Mexico by mid-2012. House Republicans passed legislation last week that would force Interior to do so.

And finally, Obama said he will create an inter-agency group to streamline the permitting process for drilling in Alaska.

Ending Big Oil Handouts Won’t Raise Gas Prices

The Congressional Research Service (CSR) says that withdrawing subsidies for Big Oil will not raise consumer gas prices.

The CSR responded to a request from Senator Harry Reid (D-NV) to provide information on the extent to which proposed tax changes on the oil industry are likely to affect domestic gasoline prices.

CSR stated: “There is little reason to believe that the price of oil, or gasoline, consumers face will increase” and that “[Since] prices are well in excess of costs…a small increase in taxes would be less likely to reduce oil output, and hence increase petroleum product (gasoline) prices.”

According to the Climate Progress Blog: “Subsidy by subsidy, the memo furnishes pithy, fact-based support for the Senate’s proposed tax changes to the top five most lucrative oil companies operating in the U.S.”

The “bombshell” memo repeatedly referred to the impact on gasoline prices a “small’.

Removing Big Oil handouts from the tax code would also have a small effect on the top five firms–reducing their profits by only a nickel for every dollar.

Automakers Oppose Fuel Efficiency Targets

Meanwhile, major automakers say they are wary of aggressive mandates for increasing the fuel efficiency of vehicles sold in the U.S.

On Thursday, the lobbying group representing GM (NYSE: GM), Ford (NYSE: F), Chrysler (FIA.MI) Toyota (NYSE: TM) and European companies sent a letter to the Obama Administration stating that if they are forced to double fuel efficiency by 2025 it could hurt their sales, employment and safety.

The administration is considering setting new fuel efficiency standards that would call for a 6% increase in efficiency each year from 2017-2025. At that rate, the average fleet efficiency would be 62 miles per gallon.

However, that level is the top of the range being considered by the administration, and the automakers want to scale back those ambitions, which are estimated to save 45 billion gallons of oil and reduce carbon pollution by 450 million tons by 2030.

“The alliance believes it is inappropriate to be promoting any specific fuel economy/greenhouse gas at this point,” John Whatley, Chief executive of the lobbying group, said in the letter.

The group was responding to a letter sent by 18 Senators last month in support of a tough, new fuel economy standard. The Senators, led by California’s Dianne Feinstein and Olympia Snowe of Maine, said the most ambitious target was “technically feasible and cost effective for consumers.”

As every year at this time of the year, journalists start to comment oil companies mega profits… What’s the truth behind these reports… Here is an interesting article to make up your mind from a different perspective.

What can we do to stop commodity speculators from causing the rapid hike in gasoline prices? Arrest them, put them in jail, and try them before a jury before we hang them?

Early last week, President Obama started that ball rolling by telling U.S. Attorney General Eric Holder to stop oil market fraud. Holder promptly announced he was appointing a “working group” focused on rooting out the cases of fraud in the oil markets that might affect gasoline prices. This might work in any other business, but the petroleum industry is not going to be simple to control.

Later in the week Exxon Mobil (XOM) reported first quarter profits went up a whopping 69% to $10.7 billion from the same quarter a year ago. This ignited a firestorm almost immediately, raising the ire of politicians and activists alike who accused the oil industry of profiteering while Americans pay nearly $4 a gallon for gasoline.

Instead of being good news, it was reported as bad news on the front page of major newspapers and became the lead off story on most TV and radio news broadcasts.

On the other hand Apple (AAPL), which showed a 95% increase in net profits in its quarter, from $3 billion to $6 billion, had Steve Jobs proudly announce those results in his April 20, 2011 news conference.

No one screamed “off with their heads” about Apple’s profits, so why all the brouhaha about Exxon Mobil and the other oil company’s profits? Surely they are both stalwart organizations making the capitalistic system work for their shareholders, expecting to receive a fair return on monies invested in those companies. They should be allowed to make a profit with products everyone either wants or needs and you can charge for them according to what the market will bear.

Exxon Mobil sent out Ken Cohen, Vice President of Public and Government Affairs, to face skeptic reporters at a news conference on April 28, 2011. He launched a preemptive public relations strike to blunt expected criticism from politicians and the public about of seeing gasoline pump prices increase along with Exxon Mobil’s profits.

The following graph from the U.S. Energy Information Agency (EIA) shows the results of what happens to oil company profits when crude oil prices increase:Click to enlarge

Ken Cohen wrote an article entitled: “Gas prices and industry earnings: A few things to think about”, which can be read it in full on the Exxon Mobil Perspectivesblog.

Exxon Mobil does not own the patents to the iPhone or iPad franchise but they have something even better by being the largest company in an oligopoly made of oil companies producing a product we cannot do without, fuel.

A few of the talking points used in Ken Cohen’s article need closer scrutiny and examination since they are now been repeated almost verbatim by pundits and analysts alike:

Point: We don’t own 95% of our station, and therefore we don’t set the price.

Counterpoint: The first part is correct; however the retail pricing manager for Exxon Mobil checks the spot market regularly during the day and makes wholesale pricing decisions dependent on the area of the country. The methods used by Exxon Mobil are rack and zone pricing giving them the ability charge whatever the market will bear. The competitive pricing data is gathered for them by third parties such as Oil Price Information Service and The Lundberg Survey. The latter is the most important one since Lundberg gathers Dealer Tank Wagon (DTW) prices for each locale in which ExxonMobil has retail operations. Rack pricing is used to set the wholesale prices for either branded or unbranded gasoline. The DTW prices are charged to those dealers that have branded supply contracts direct with Exxon Mobil. These are not the prices posted on the pumps at the station and are the most secretive part of gasoline retailing. Zone pricing, or a Temporary Voluntary Allowance (TVA) method of pricing, controls almost 85% of all the branded-contracted gasoline sold in the U.S. with the difference sold to unbranded non-contracted stations.

Point: Local stations are often owned by a businessman or businesswoman in your community, and they set their own prices based on local market conditions.

Counterpoint: The owner or dealer of a local station receives deliveries of gasoline with the new wholesale price set by the oil companies, and then adds a margin to the gallon of gasoline. They are contractually obligated with long term supply agreements to only buy from the “branded” supplier with whom they signed up.

Point: For every gallon of gasoline, diesel or finished products we manufactured and sold in the United States in the last three months of 2010, we earned a little more than 2 cents per gallon.

Counterpoint: Adding all the oil company profits together including their upstream, downstream and chemical divisions and then dividing that amount by the total gallons of fuel sold is somewhat misleading. Each one of those is separate profit centers and not the only products sold by the oil company. The following Energy Information Agency graphs shows the breakdown of the average price for a gallon of gasoline paid at the pump in March 2011:

Point: Crude oil is a commodity, and like all other commodities – such as corn, wheat or sugar – the price is determined by buyers and sellers in a global market.

Counterpoint: Exxon Mobil is one of five “super major” vertically integrated oil companies in the U.S. controlling the process of refining gasoline from the wellhead to the pump. Crude oil, the raw material from which gasoline is refined, is either purchased or obtained from company owned or controlled wells with prices set according to the gravity of the crude oil. Exxon Mobil utilizes the “Last In/First Out” method of accounting and the last price at which crude oil was obtained establishes the posted price for crude oil delivered to their refinery gates.

Point: Exxon Mobil owns less than 1% of the world’s oil reserves, and it produces less than 3% of the world’s daily oil supply.

Counterpoint: Exxon Mobil is the largest oil company in the world and when the elephant in the jungle trumpets, the market listens. The throughput of its refineries and percentage of market share have a big influence on the other oil companies’ reaction on how they in turn price their products.

Point: Last year, our total taxes and duties to the U.S. government topped $9.8 billion, which includes an income tax expense of $1.6 billion.

Counterpoint: This is a somewhat misleading statement since taxes and duties include tax credits allowed on payment to foreign governments. It is another subsidy, devised by the U.S. State Department in the 1950s, which allows U.S. based oil companies to reclassify the royalties they are charged by foreign governments as taxes. Those can then be deducted dollar-for-dollar from their domestic tax bill. That provision alone will cost the federal government $8.2 billion over the next decade, according to the Treasury Department. These are currently allowed to be reported as taxes paid to the U.S. government. The following opinion re-printed from the Harvard Law Review gives a more detailed explanation on how this works:

BP (BP), Chevron (CVX), ConocoPhillips (COP) and Shell (RDS.A), the other four super-major oil companies, said their profits rose in the first quarter because of soaring crude prices and other factors.

Members of Congress and President Obama used the record setting earnings reports to step up calls for the repeal of the $4 billion in annual depletion allowance tax breaks for oil producers. John Boehner (R-Ohio), Speaker of the House, first seemed to want to go along with eliminating this tax break only for the large oil companies, but then changed his mind.

Jeff Sheets, Chief Financial Officer of ConocoPhillips, said that while the industry’s profits are higher, the margins are still slim compared to the amount of assets oil companies maintain, and profits haven’t risen as fast as gasoline prices. “When critics focus only on the bottom-line number, they lose the scope of what’s required to produce that profit,” Sheets said.

The industry further argues that ending tax breaks would cut investment in new oil and natural gas projects, cost new jobs and decrease oil and natural gas production.

Senate Majority Leader Harry Reid (D-Nev.) said the Senate as early as next week could take up Obama’s proposal to halt the tax breaks, and Obama said the $4 billion a year in oil subsidies would be spent on alternative energy investments.

Holding a commodity off the market and then selling it after the price goes up is only one form of speculation, and it’s not one that works very well in the oil market. Simply put when gasoline prices increase so do profits for the oil companies.

Oil prices have climbed above $110 a barrel, prompting producers, including Saudi Arabia, to ramp up spending on new fields to increase their output capacity and make up for supplies that have been cut off from Libya.

“The absence of Libyan production worries the oil producers. They do not like too high… oil prices because of the potential it has to destroy demand,” said Chief Executive Andrew Gould. “I think that I’m much more confident that the international stream is going to come back faster.”

Still, Schlumberger’s first-quarter operations were hurt by the unrest in energy-rich countries Egypt, Tunisia and Libya.

Flooding in Australia and poor weather in North America also dampened its business, but Gould said the energy industry was spending heavily to make up for Libya and higher demand for gas and fuel oil in Japan.

One analyst said the company’s profit margins remained healthy compared to its peers.

“They’ve essentially caught up to Halliburton in North American margin performance,” said Kurt Hallead, an analyst with RBC Capital Markets in Austin, Texas.

Halliburton (HAL.N), the global No. 2 in oilfield services and market leader in North America, topped market expectations on Monday, with its first-quarter earnings [ID:nN15257560] boosted by its business in the United States.

Schlumberger’s first-quarter profit rose to $944 million, or 69 cents per share, from $672 million, or 56 cents per share, a year earlier.

Excluding one-time items, Schlumberger earned 71 cents per share, compared with the 76 cents that analysts expected, according to the average on Thomson Reuters I/B/E/S.

Schlumberger warned late last month that turmoil would knock 8 to 10 cents per share off its first-quarter earnings. [ID:nN28176824].

Earlier on Thursday, Weatherford International Ltd (WFT.N), the world’s fourth-largest oilfield services company, reported a first-quarter profit compared with a loss a year earlier, helped by higher revenue in the company’s North America segment. [ID:nL3E7FL0FX]

Schlumberger’s shares rose 1.4 percent to $89.09 per share on the New York Stock Exchange, bringing its gain so far this year to nearly 7 percent